Editor's note: Social Finance's recent bid for a Utah industrial loan company has opened old wounds from the previous ILC debate in 2006 that featured a higher-profile applicant: Walmart.

The retail giant's banking ambitions unified banks and anti-Walmart forces in opposition. State legislatures passed laws to block a future Walmart bank from opening branches, while lawmakers in Washington sought legislation to prohibit new ILCs owned by commercial companies.

This story, from April 6, 2006, looked at concerns from relatively obscure ILC operators over how the uproar was affecting their industry. Ultimately, Walmart withdrew its application, and the issue largely dissipated.

Is Wal-Mart Changing the ILC for Everyone?

By Joe Adler

WASHINGTON - For J.J. Singh, the industrial loan company debate is less about Wal-Mart Stores Inc. than about banking services for truck drivers.

The chances that his Utah ILC, Transportation Alliance Bank, can open full-fledged branches at truck stops across the country are less likely now that a handful of states are mulling bans on ILC branching.

Truck drivers "are on the road from Sunday to Saturday, and the truck stops are their home away from home," said Mr. Singh, the president of the $341 million-asset industrial bank, which now provides automated teller machine and computer banking at 180 Flying J travel plazas in the United States and Canada. "For these folks, they need banking where they work."

Walmart
Walmart's industrial bank application led to state branching bans and proposed federal legislation to block commercially owned banks. But ILC executives maintained that their industry was being misunderstood. Bloomberg News

Mr. Singh's concerns echo those of much of Utah's booming ILC industry, which has nearly quintupled in assets in the last six years but now finds itself in an unenviable spotlight.

ILC executives say their industry is being misunderstood in the furor caused by Wal-Mart's application.

Critics "can't point to any regulation problems or an unhealthy industry," said Phillip Ware, the president of the $69 million-asset Celtic Bank, a Salt Lake City ILC specializing in construction and small-business loans.

"What's motivating all of this is, either you love or you hate Wal-Mart," he said.

Opposition to Wal-Mart's application has amplified the years-long question of whether ILCs - especially those owned by commercial firms - are sufficiently regulated. The institutions now are supervised by agencies in the seven states that offer the charter, as well as the Federal Deposit Insurance Corp.

Wal-Mart's application has been pending at the FDIC since July. Responding to pressure from the retailer's opponents in Congress, the agency is scheduled to hold the first of two public hearings on the application Monday. But most experts agree the FDIC will eventually approve it. For one thing, Wal-Mart has scaled back its ambitions from retail banking to merely processing payments. For another, rivals such as Target Corp. already have won government approval to operate an ILC.

In addition to the branching bans being mulled in several states, ideas floated in Washington for tightening the grip on ILCs include subjecting their parent companies to Federal Reserve Board oversight and preventing branching by ILCs owned by companies with 85% of their assets in commercial, rather than financial, activities.

The most stringent proposal for a regulatory overhaul has come from Rep. James Leach. The Iowa Republican introduced a bill in September that would force ILC parents to become financial holding companies under Fed supervision and give up any commercial activities.

"The question becomes: do I keep making BMW's, or do I keep this little bank," said Doug Foxley, the director of the Utah Association of Financial Services, referring to one of the many automakers that owns ILCs in the state.

Rep. Leach's bill has not made much headway, but it is backed by Fed Chairman Ben Bernanke and former Chairman Alan Greenspan. And it has sparked other policy proposals. One being quietly pushed by the nation's largest banks, which are concerned about an uneven regulatory playing field, would give the Fed oversight of commercial parents while allowing them to keep their ILCs.

But Mr. Ware, who formerly worked with Morgan Stanley's industrial bank, known as Morgan Stanley Bank, said such an outcome would be tough to stomach even for the financially owned ILCs.

These companies "would not want the Fed dealing with their parent company, not because they have anything to hide, but the Fed could come in and micromanage their business," he said.

The proposed clampdown presents the banks - many of which are small, niche operations - with few options. The ILC is the last legal option for commercial companies to do banking.

George Sutton, the former Utah banking commissioner who now represents industrial banks like Target's, said car companies, many of which use ILCs for financing services, could convert to finance companies.

"These companies can do that business one way or another," he said. "The question is do they do it with a bank or go to the less efficient option of the financing company."

ILCs owned by financial companies could adopt a bank or thrift charter.

Gerry Smith, the president of the $7 million-asset WebBank, which is owned by a hedge fund and specializes in small-business lending, said he could "become a state-chartered bank or a national bank and be regulated" by the Office of the Comptroller of the Currency.

Mr. Ware's bank is owned by a shell parent known as Celtic Investments. "If I could not be an industrial bank, I'd have a commercial bank charter," he said. "If I were a state-chartered nonmember bank, for example, I'd be regulated exactly as I am now."

Fifteen examiners will begin a two-week exam of his bank April 17, he said.

"The FDIC and the state - they're tough. If you don't get over the bar, they're not going to be patient with you," he said.

Of the seven states with ILCs, Utah has been the most successful by far in attracting institutions.

Since 1994 assets in Utah industrial banks have grown from $1.8 billion to over $115 billion, according to the latest figures from the Utah Department of Financial Institutions. The Fed estimates it is a $140 billion industry.

Utah banks operating under other charters hold just $4.4 billion of assets, and state-chartered thrifts have just under $500 million, according to the state's figures.

Thirteen of Utah's 33 industrial banks are owned by commercial firms. The vast majority of the assets are controlled by financial firms. The state's largest industrial bank, Merrill Lynch Bank USA, has more than half of the industry's assets alone, with $60 billion, and is one of just two Utah ILCs with branches - one each in New York and New Jersey.

Industrial banks "obviously don't like the controversy swirling around," Mr. Sutton said.

Any state branching ban, he said, is "not going to withstand a legal challenge, because there is no defensible reason to enact them."

Like many other ILC executives, Mr. Singh, who sees out-of-state branching as a natural progression for Transportation Alliance, says he is neutral about Wal-Mart's application. But with the retailer so visible in the debate, the benefits that ILCs provide consumers are being missed, he said.

"Ours is a very, very specific niche market," Mr. Singh said. "You're not going to lend to an industry that you don't know very well, and banks in general that are comfortable with the trucking sector are hard to find."